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Updated @ 7:50 a.m. EST, Monday, November 8, 2010.


WELCOME TO TRUE CONTRARIAN! I will attempt to create an entertaining, readable, and hopefully refreshing viewpoint from time to time. Each issue will feature my intermediate-term financial outlook, my long-term financial outlook, and a personal reminiscence. Those who believe in this investment philosophy should subscribe to my daily update service which I began in February 2006.

There are those who believe that QE2 and many other government actions will save the global financial markets, and those like top corporate insiders who know better. --Steven Jon Kaplan

DO AS TOP CORPORATE INSIDERS DO, ESPECIALLY AT EXTREMES (November 8, 2010): Top corporate insiders worldwide have been selling shares at their fastest pace relative to insider buying since the second half of 2007 in many countries including the United States, and at an all-time record pace in many countries including India. Numerous subsectors, in the U.S. and elsewhere, have also seen record ratios of insider selling to insider buying. Those insiders who have the best track records with their trading have been among the most aggressive sellers. Regardless of the reasons, which are unimportant anyhow, they know that QE2 and all other government attempts to manipulate the economy will come to naught. More importantly, they recognize the dangerous overvaluations not only for equities around the globe, but also for real-estate prices.

While the housing bubble in the United States received some attention in 2005-2006, it was peanuts compared with today's real-estate bubbles around the world. U.S. housing prices reached just over twice fair value before they began a plunge which will surely continue for at least a few more years. At that time, the total value of U.S. residential real estate to GDP was at 1.8. Today, this ratio is 3.5 times GDP in China, 3.3 times GDP in Australia, 3.2 times GDP in New Zealand, 3.1 times GDP in the United Kingdom, and at similarly dangerous levels in numerous other countries including India, Canada, Indonesia, Brazil, Malaysia, Singapore, Colombia, Peru, Chile, and in other nations far too numerous to list here. If you rent out the average house in China today, your annualized rent will be equal to only 2.5% of the price of the house, versus a historic average of 7.5% in China and elsewhere for centuries (or millennia). This means that Chinese prices are at three times fair value. If you want to see what happens when a housing bubble at three times fair value collapses, as it inevitably must, then all you have to do is take a trip to Dublin, Ireland and look around.

Especially since the global real-estate and equity bubbles have been ignored or even cheered as allegedly bullish for the stock market, for commodities, and practically everything else, the opposite must inevitably occur. Just as we saw in the United States when the housing bubble burst especially in areas including Florida, Arizona, and Nevada in recent years, a surge in foreclosures will lead to all sorts of economic ills. The recent extreme bullishness toward equities and commodities must therefore lead to a dramatic pullback for these and virtually all other risk assets over the next two years, as we begin a global bear market which will rival and perhaps surpass the 2007-2009 bear market in terms of intensity and magnitude.

The problems in the global economy have not gone away during the powerful bull-market surge which began near the end of August 2010; it's just that you don't hear about bad news whenever risk assets are rising in price. Europe has a worse debt crisis than ever. Unemployment around the world has begun a multi-year increase which will persist for several more years. In every past era of stagnation dating back to the late 1700s, the dividend yield on any major basket of U.S. largecap equities has exceeded 6.0%; it reached only 3.5% at its highest point in early March 2009. While the last decade has been a very poor one for equity performance around the world, the next decade will likely be even worse as numerous pricing excesses have to be unwound and massive new borrowing has to be deleveraged.

One of the few beneficiaries of the global bear market for risk assets through 2012 will be a powerful surge in the value of the U.S. dollar. While almost everyone has been incredibly negative toward the greenback, the U.S. dollar index has completed yet another higher low in a bullish pattern dating back more than 2-1/2 years. On March 16, 2008, the U.S. dollar index bottomed at 70.698. Since then, it made a higher low on July 15, 2008 at 71.314; another higher low on November 25, 2009 at 74.170, and perhaps yet another higher low on November 4, 2010 at 75.631. As the greenback likely accelerates its uptrend and probably eventually achieves a nine-year peak, this will put substantial downward pressure not only on obvious assets which correlate negatively with the U.S. dollar, such as gold and silver, but also on high-yield corporate bonds, emerging-market equities, and virtually all of the favorite amateur investment choices of the past year. While everyone is looking up and asking when we're going to reach the sky, look down toward the solid ground.

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·  Overview of Gold Mining Shares, updated substantially on November 9, 2008 to show precisely how precious metals shares have completed important six-year bottoms.

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Your comments are always welcome, or send an e-mail to sjkaplan@truecontrarian.com.

A SINCERE THANK YOU to Barron's for featuring me on page 50 of their November 19, 2007 issue, and then again on February 25, 2008 (page M14) and June 2, 2008 (page 41), as well as August 25, 2008 (page 32). Most recently, Barron's featured my letter to the editor about investing in Africa in their Mailbag of August 14, 2010, which you can read at the link below:

CURRENT ASSET ALLOCATION (marked to market at the close on November 5, 2010):
My own personal funds are currently allocated as follows:
Local checking accounts averaging 1.00%, brokerage accounts averaging 0.50%, and other cash equivalents, 47.6%;
TIAA/CREF Traditional Annuity Fund and Putnam Stable Value Fund (retirement funds with stable principal paying variable interest averaging 3.25%, no ticker symbols), 25.1%;
Coins and related collectibles purchased in 1997-2005, 6.6%;
Volatility futures fund VXX, a losing position, 3.6%;
Claymore natural gas futures fund CYMGF/GAS-T (Toronto), another losing position, 3.3%;
QQQQ synthetic short fund PSQ, 0.3%;
Thomson-Reuters TRI, purchased at a 15% discount, 0.1%;
U.S. Treasury fund TLT, 0.0% (sold entirely in late August 2010; average gain 22.2% including reinvested dividends);
Gold mining funds GDX, ASA, BGEIX, INIVX, 0.0% (GDX mostly sold at 50.12-50.17 on January 11, 2010, some sold at the open at 49.48 on January 12, 2010, average gain 81%; ASA sold at 80.00 on January 12, 2010, average gain 100%);
Coal mining fund KOL, 0.0% (sold near 40 on January 6, 2010; 8th-best mutual fund in 2009, average gain 212%);
Russian fund RSX, 0.0% (sold near 33.25 on January 6, 2010; 11th-best mutual fund in 2009, average gain 202%);
Natural gas producers' fund FCG, 0.0% (sold slightly below 19 on January 6, 2010, average gain 81%);
High-yield BB corporate bond fund VWEHX, 0.0% (sold on January 6, 2010, average gain 48%);
Japanese smallcap funds DFJ, SCJ, JSC, JOF, SPJSX, 0.0% (sold on January 6, 2010, with JOF at 7.58, average gain 28%);
Energy closed-end fund PEO, 0.0% (sold on January 6, 2010);
General equity closed-end funds ADX, CET, 0.0% (sold on January 6, 2010);
Crude-oil futures fund USO, 0.0% (sold on January 6, 2010);
Silver bullion fund SLV, 7.2%.
Nasdaq 100 Trust QQQQ, 4.4%.
South Korean equity fund EWY, 1.8%.
I closed all of my other short positions in October 2008, which had amounted to just over half of my entire net worth.

REMINISCENCE OF THE WEEK (October 31, 2010): In the 1980s, I was very fond of the "Travel" section of the Sunday New York Times, which unfortunately has since badly deteriorated in quality. I would often read only that section and ignore the remainder of the newspaper. In the more sophisticated sections of Manhattan, one could find as many as a dozen discarded Sunday papers in any street-corner wastebasket. One Sunday morning in 1989, I went jogging and didn't leave myself enough time to take a shower afterward before leaving to meet a few friends. I headed out in my clothes from the previous day, with my hair unbrushed and not having been cut for several weeks. Being in a rush, I took less time than usual to arrange myself, so my belt was asymmetric, my shoelaces were lopsided, and my clothes were more badly mismatched than I had realized. It was quite hot and humid, so I began to sweat as I walked quickly in the westernmost part of Greenwich Village, with its cobblestone streets and expensive row houses. I realized that my hair had become so stringy that I had difficulty keeping it out of my eyes, while my shirt was hanging out of my trousers and looking sloppy. I decided that before I would enter the meeting place with my buddies, I would go into a restaurant restroom and spend several minutes making myself more presentable. I spotted an ideal place for that purpose, but before entering, I noticed out of the corner of my eye that the Sunday New York Times "Travel" section was conveniently located on the top of a wastebasket just a few feet away. I reached over to pick it up with one hand, and put the other hand out to balance myself. I suddenly felt something metallic in my open hand. Puzzled, I looked to see that a well-dressed older woman had placed a quarter in my palm, and was walking away with her back to me. She must have perceived me to be a homeless man.

·  Best of Previous Reminiscences

(c) 1996-2010 Steven Jon Kaplan Your comments are always welcome.

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